Tough questions facing Glaxo

NO ONE apart from its competitors should really enjoy today's news that profits at GlaxoSmithKline have fallen sharply, or that the share price is now only just over half what it was a year or so back.

It forms too big an element of the UK stock market and our pension funds for us to look comfortably at the ageing, without replacements, of its former chart-topping drugs.

It is also unnerving this lacklustre performance should come on top of yesterday's announcement from Vodafone, whose figures showed that despite paying zillions to chief executive Arun Sarin it is uncomfortably close to proving only that two plus two makes three.

It is ironic that Glaxo's new chairman is Sir Christopher Gent, who created Vodafone in a series of gigantic takeovers.

This lack of real growth in two of our most important companies is uncomfortable. Does it mean size is not all it is cracked up to be? Management loves scale because doing deals is so much more fun than running the business, so much more glamorous and lucrative, because people get paid more for running big companies. Indeed, exactly that was given as a reason for one of Gent's major pay rises at Vodafone. But at a time when everyone says businesses need to be nimble, should we be creating giants that seem just too complex to manage flexibly?

There's another problem. The manufacturing businesses where Britain can still compete are those with a huge embedded scientific knowledge base - companies such as Rolls-Royce, where even after 25 years no one else has ever built a jet engine that will power a plane like the Harrier. And, yes, companies such as Glaxo with its huge scientific expertise, harnessed to the discovery and development of drugs.

But again, size can be the enemy. Each pharmaceuticals merger down the years has had as its justification that size was necessary to fund research. Now, however, there are suspicions that vast multinationals find it impossible to foster the truly creative geniuses who make the real breakthroughs.

There is talk of outsourcing drug development to small research boutiques - which has the seductive short-term advantage that all the R&D goes off-balance sheet and the money can instead be used to boost profits. Perhaps the City would like that. But is it really the kind of business that will secure Britain's future? Do we really want one of the world's scientific leaders to evolve into a marketing and sales organisation whose unique skill lies only in its awesome coverage and market power - the access it has to almost every medical person on the planet?

Surely the real wealth creation in Glaxo comes from drug development and, however tough it may be, that is where management energy ought to be focused. After all, what is the point of paying millions for the best management money can buy to run a drugs company if it cannot maintain the flow of new drugs?

Nuclear option

WHEN then Transport Secretary Stephen Byers pulled the plug on Railtrack a few years ago, his plans for a new body to take over the assets of the company left shareholders with nothing. Such was the uproar, coupled with the threat of legal action, that the Government eventually gave ground and offered a reasonable price for the assets.

The developing saga at British Energy is not without its parallels. The nuclear electricity generator, which owns Sizewell B and a clutch of other nuclear sites, produces 20% of Britain's electricity, but that did not stop it going bust two years ago when the wholesale price of electricity fell below its cost of production.

Because the country needed the power and nuclear stations cannot be left to fester, the Government provided loans and guarantees to buy time for the chronicly-indebted company to be restructured. The deal is complex but, in essence, the Government gets a 65% stake, bondholders 34% and shareholders just 1%.

But the deal is still not ready to be put to shareholders and, in the meantime, electricity prices have recovered so BE is no longer a basket case. Indeed, it is profitable and could be made more so.

Now shareholders, led by hedge fund Polygon and Invesco, want a better deal. They don't mind the Government keeping 65% but they would like a stab at buying out the bondholders so shareholders get the remainder. They think it would make the shares, now almost valueless, worth between 50p and 100p.

The company is refusing to budge, but there are a quarter of am small shareholders left from privatisation and an election coming up. How long before an embarrassed Government suggests it at least consider Polygon's Plan (Sizewell) B?